It comes to the crunch for the Bank of England

Analysts poring over the latest indications of the damage being inflicted on the British economy by the global credit crisis could come to only one conclusion: things are bad and getting uglier. As banks pull one mortgage product after the next from the market, the Bank of England's quarterly credit report showed conditions faced by households and businesses were tightening at an alarming rate.

And the CIPS/NTC survey of the services sector, which until recently had appeared to be sailing on robustly in defiance of the credit crisis, had weakened sharply.

Car sales are down sharply, the construction industry is contracting, financial services jobs are being cut and no one can get a cheap mortgage any more. It doesn't look pretty. Credit card lending has soared as consumers find it impossible to borrow elsewhere.

Small wonder, then, that the latest poll of analysts from Reuters last night showed a sharp swing in opinion about what the Bank of England will do next week. Expectations are now firmly for another interest rate cut, if for no other reason than to counteract the effective rate rises that commercial banks have been handing to their customers.

We heard the Bank's executive director Paul Tucker on Wednesday saying in effect that rates could not be cut sharply or quickly because of continuing concern about inflation.

Which brings us to what the Bank is required to do. It has to keep inflation at close to 2% at all times and subject to that it has to support the government's objectives for economic growth and employment. But the risks to growth are big and growing bigger by the day. There are inflationary pressures around, but if the economy tips into recession there will be powerful deflationary forces that would very likely cancel out the effects of higher petrol and food prices.

Last year the Fed was caught napping with rates at 5.25% and has slashed them to 2.25%. As it looks increasingly like the UK could be going the way of the US, rates appear very high here. The Bank must cut them next week, and by more than just a quarter of a point.

More turbulence

So the Terminal Five fiasco of the past week (431 flights cancelled so far, and counting) has cost British Airways £16m. Investors will be pleased because normal service is promised for next week and relieved because it could have been worse.

Unfortunately, for them it still could be. BA's reputation has taken a battering just when the flag carrier's transatlantic competitors are taking roost at Heathrow thanks to the Open Skies treaty, which came into force four days after T5 became a national farce.

There are plenty of issues BA can't influence; like the oil price, the US recession and Naomi Campbell being arrested for having a hissy fit about BA's incompetence. But there are plenty more problems stacking over BA's Heathrow HQ that chief executive Willie Walsh will not want to spiral out of control like a supermodel's temper.

The first will be the transfer of the airline's remaining long-haul operations from Terminal Four to T5, which must go to plan. The move will include its highly profitable New York flights plus its increasingly vital services to India and Asia. This represents a near-doubling of T5's capacity, and nothing that has happened in the past week will give investors or passengers confidence.

A failed transfer will see a repeat of last week's scenes, more cancellations and a flood of lucrative transatlantic passengers taking their chances with one of the scores of new US-bound services operating out of Heathrow. A £16m hit is not material (just over 1% of profits), but a significant loss of transatlantic passengers during an economic downturn would be a very a serious blow.

Meanwhile Walsh must head off a threatened strike by his pilots, many of whom believe the T5 crisis is due to his poor management.

Naturally they would say that, but Walsh has done better than many of his predecessors in handling industrial relations issues and won't want a clash. He can resolve the dispute either by postponing the launch of the airline that has caused the dispute - OpenSkies - or he can cave in to the pilots' demands and change the terms under which flight crew are hired.

Neither option makes him look like a strong leader, but the alternative is yet more footage of stranded passengers.

Walsh took personal responsibility for last week's T5 debacle, though it would have been hard to pin the blame on someone else after he made the T5 move a big part of his vision for the company.

If the T5 debacle is repeated or schedules are disrupted by striking pilots, the BA boss might start to look as accident-prone as Bob Ayling, one of his hapless predecessors. Like Ayling, Walsh may then have to be dispatched.